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The Great Contraction

Martin Wolf has an excellent analysis of the struggling global economy in today’s FT. He writes:

What has the market turmoil of August been telling us? The answer, I suggest, is three big things: first, the debt-encumbered economies of the high-income countries remain extremely fragile; second, investors have next to no confidence in the ability of policymakers to resolve the difficulties; and, third, in a time of high anxiety, investors prefer what are seen as the least risky assets, namely, the bonds of the most highly rated governments, regardless of their defects, together with gold. Those who fear deflation buy bonds; those who fear inflation buy gold; those who cannot decide buy both. But few investors or corporate managers wish to take on any longer-term investment risks…

The depth of the contraction and the weakness of the recovery are both result and cause of the ongoing economic fragility. They are a result, because excessive private sector debt interacts with weak asset prices, particularly of housing, to depress demand. They are a cause, because the weaker is the expected growth in demand, the smaller is the desire of companies to invest and the more subdued is the impulse to lend. This, then, is an economy that fails to achieve “escape velocity” and so is in danger of falling back to earth.

As Wolf then notes, political deadlock and disagreements in both the US and Europe exacerbates this situation enormously.

Now consider, against this background of continuing fragility, how people view the political scene. In neither the US nor the eurozone, does the politician supposedly in charge – Barack Obama, the US president, and Angela Merkel, Germany’s chancellor – appear to be much more than a bystander of unfolding events, as my colleague, Philip Stephens, recently noted. Both are – and, to a degree, operate as – outsiders. Mr Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed. Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing. The realisation that neither the US nor the eurozone can create conditions for a speedy restoration of growth – indeed the paralysing disagreements over what those conditions might be – is scary.

Unfortunately, he is quite right.

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  • stephen b

    The opposition facing Mr Obama was non-existent his first two years in office. Democrats controlled DC two years prior to that. To say Republicans want the country to fail is not true. There is big disagreement about how to go about succeeding though. Mr Obama’s policies, so far, have not produced much to be “hopeful” about.

  • Dave Boutilier

    What a load of crap. There is no basis whatsoever for the assertion that Obama’s opposition would prefer to see the country fail than have him succeed. That is pure slander.

    Obama’s opposition believes him to be baffled by the demands of leadership, clueless about the causes of the current crisis, and helpless to react constructively to events. They are trying, within the limits of law and constitution, to take the steering wheel from his hands and put the state back on the road.

    Why would you print such garbage without comment?

  • Soul

    Have to admit, this isn’t my favorite article of the day. Obama is not the “adult in the room” some in the press like to say he is.

  • Kenny

    “The realisation that neither the US nor the eurozone can create conditions for a speedy restoration of growth – indeed the paralysing disagreements over what those conditions might be – is scary.”


    Elect a conservative president in 2012 (Perry for example) and a GOP Congress with a fulibuster-proof Senate, and you’ll see the economy grow significantly in two years.

    The conservative will cut regulation, exploit our natural resources, and cut taxes — all which will stimulate growth.

    If the they have the stones to do it, the GOP would also cut the minimum wage, repeal Bacon-Davis, encoruage right-to-work laws, cap unemployment insurance cut wasteful programs like Head Start, deport illegal aliens (this will help the lower unemployment), and cut funds to Americ-haters like the dysfunctional U.N., etc.

    Also, foreign adventures & cmmitments could be limited and that would save a bundle.

    The economy can be turned around faster than the elite thing. Perhaps the elite don’t what this to happen because it would diminish their personal power.

  • Frank V.

    I will take what Mr. Boutilier said one step further.

    The opposition party wants the President to fail, not the country, precisely because they do NOT want the country to fail. Everyone of his misguided policies push the U.S. deeper into the quagmie of this endless, or is it double-dip, recession with little near or mid-term hope of recovery.

    I, too, am puzzled by Mr. Meade neglecting to comment on this gross assertion that has zero basis in fact.

  • Michael Brazier

    No, Wolf isn’t quite right. Obama faces an opposition that is convinced that, if the President succeeds, the country will fail. The root of his troubles, however, is that his opposition has the better argument – Obama’s sole policy idea is to build up the American welfare state to new heights, at just the moment when welfare states throughout the world are collapsing under their own weight.

  • Mick The Reactionary


    “In Obama US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed.”

    When Mr Wolf have seen Barry O the first time, he had a tingle running up his leg. Unfortunately, the tingle has reached his brain and melted it.
    Sadly, Mr Wolf will remain a brainless fool for the rest of Barry’s term.

    @Frank V.:
    “I, too, am puzzled by Mr. Meade neglecting to comment on this gross assertion that has zero basis in fact.”

    Why is the puzzle? Proff Mead is a brilliant analyst and an excellent writer.

    His views? They are virtually pure Conventional Wisdom cleverly expressed.

    And in CW, Obama is Above-The-Racial divide genius and Repubics are Obama-lynching neanderthals.

  • Scott

    I was just bragging to someone yesterday that I like this blog because I think you’re right about 95% of the time. I guess this post falls in the 5% of the time that you’re wrong. Saying Wolf is “quite right” that Obama’s opposition would rather see the country fail than Obama succeed is based on what?

    From what I can tell, Obama’s opposition does not want the country to fail. Boehner and McConnell said repeatedly during the debt ceiling debate that they were not going to allow a default on the public debt. Obama, on the other hand, went on TV and told seniors they might not get their social security checks. His top military guy told the troops fighting in foreign lands that they may not get paid.

    Obama told the Republicans he’d veto any bill that didn’t push the next fight about the debt ceiling out past the election. So he’s the one threatening to push the country into default if he didn’t get his way about the debt ceiling.

    The Republicans passed in the House the bill known as Cut, Cap & Balance with Democrat support, and Harry Reid refused to bring it up for debate in the Senate. CC&B would have prevented the credit rating downgrade. Obama and the Democrats have added a staggering $4 trillion to the national debt in 2.5 years. That’s their contribution to the downgrade.

  • Nissen

    Another possibility is that other sides of the conventional wisdom are wrong, and that having wasted our seed corn just makes it sooner and more positive that the old approach to economic “growth” will never return as we knew it, meaning we all will need to figure out how to make a living without depending upon the economy, corporations, etc., getting getting bigger and bigger. “Beyond Developmentality” is how Debal Deb phrases it. Mike Nickerson calls it “Life, Money and Illusion.”

  • Jacksonian Libertarian

    There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.
    Since the Democrat’s spending binge began with their first budget in 2008, the Federal Government Monopoly has sucked $4.5+ Trillion from the fuel tank of available job creating investment capital, increasing debt by 35% of GDP. Hoover only sucked 25% of GDP during his presidency, and look what he created, Great Depression 1.0.
    Wolf hasn’t a clue, he is a Keynesian just like Obama and Merkel, he thinks the economy is fragile; he points out the fear of deflation and inflation at the same time, but doesn’t explain how this is even possible.
    Welcome to Great Depression 2.0, we got here the same way as last time, and we will get out of it the same way as last time, when the Government Monopoly starts refilling the fuel tank by paying off the debt as it did after WWII.
    Demand = Income + change in Debt
    (The Government Monopoly is always a cost to the economy either as taxes, higher interest rates, or compliance with regulations, and is subtracted from income and debt)
    This means the economy can’t grow when Debt is declining. M3 money supply is still $500 Billion below its’ 09 peak, despite Fed printing of $2.3+ Trillion.
    So until the burden of the Government Monopoly is massively lessened this vehicle’s engine lacks the fuel to move. (Automotive references are Manly, very Jacksonian, I’m so proud)

  • phil g

    Obama’s policy preferences are doomed to fail regardless of the opposition’s opinion. Republicans are trying to minimize the bleeding until they have sufficient numbers to change this failed policy direction.

    If only those big ol’ mean Repubs would just cooperate, this whole mess would be fixed.

  • Nissen

    Sorry, that prior post should have read “both” sides of the conventional wisdom (approach to growth)

  • Toni

    To claim that Obama’s opposition “would prefer their country to fail” is despicable.

    Dr. Mead, would you please clarify your own views regarding what many here see as calumny?

  • Lexington Green

    “In fact, he faces an opposition that would prefer their country to fail than their president to succeed.”

    Open the hatch on the comments section, and climb down the ladder, and I see about a dozen people beat me to it on this baseless falsehood from the otherwise usually good Mr. Wolf.

    It seems that it is open season on brazenly obvious lies about Mr. Obama’s opponents. As an active Tea Partier, I am perversely enjoying the increasingly frenzied claims of racism directed at a group that not only has plenty of Black people in it, but has nothing to do with race at all. As Mr. Obama’s ill-conceived presidency continues to publicly disintegrate, his supporters will have nothing left but vilification and intimidation to try to preserve him in office. It will probably work, sadly. But it will still be wrong, and lies are lies even if you get away with them.

  • Fred Fnord

    Wow. I can see this site’s commenters run the gamut of the entire political spectrum of the United States, from A to B.

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